Hedge fund manager and former Goldman Sachs partner Steven Mnuchin confirmed to CNBC on Wednesday morning that President-elect Donald Trump has nominated him for the position of Secretary of the U.S. Department of the Treasury.

Trump’s choice of Mnuchin, 53, who served as the President-elect’s national finance chairman during his campaign, is considered controversial because Mnuchin has never worked in government and his roots in Wall Street would seem to conflict with Trump’s anti-financial industry sentiment during his campaign.

One area where he does agree with Trump, however, is the need for reduced regulation. Mnuchin laid out a number of his initiatives on CNBC’s Squawk Box, should the U.S. Senate confirm him as the 77th Treasury Secretary. One of those is to roll back the Dodd-Frank Wall Street Reform and Consumer Protection Act, which passed in 2010 and is considered by the Obama Administration to be one of its greatest achievements. In various speeches and interviews throughout his campaign and since his election, Trump has vowed to overhaul the controversial financial reform law.

“We (Mnuchin and Trump’s choice for head of the U.S. Department of Commerce, Wilbur Ross, also announced on Wednesday) have been in the business of regional banking, and we understand what it is to make loans,” Mnuchin told CNBC. “That’s the engine of growth to small- and medium-sized businesses. The number one problem with Dodd-Frank is it’s way too complicated and it cuts back lending. So we want to strip back parts of Dodd-Frank that prevent banks from lending, and that’ll be the number one priority on the regulatory side.”

Mnuchin told CNBC that the U.S. economy can sustain a growth level of between 3 and 4 percent. In fact, he called sustained economic growth “our most important priority.”

“It is absolutely critical for the country,” Mnuchin said. “We absolutely can have sustained growth at that level. To get there, our number one priority is tax reform. This will be the largest tax change since Reagan. We’ve talked about this during the campaign. Wilbur and I have worked very closely together on the campaign. We’re going to cut corporate taxes, which will bring huge amounts of jobs back to the United States. We’re going to get to 15 percent, and we’re going to bring a lot of cash back into the U.S.”

In an interview with Fox Business after the announcement of his nomination, Mnuchin said he believes that the controversial government conservatorship of Fannie Mae and Freddie Mac should end and that the private market should have more of a share in the mortgage market.

“We will make sure that when they are restructured, they are absolutely safe and don’t get taken over again. But we’ve got to get them out of government control,” Mnuchin said, according to Bloomberg.

“A resolution of the conservatorship of Fannie and Freddie appears likely with Mnuchin as Treasury secretary,” says Tim Rood, Chairman of The Collingwood Group. “His experiences at Dune Capital, particularly the IndyMac/OneWest purchase and turn around, will most certainly influence his decision-making calculus.”

Five Star Institute President and CEO Ed Delgado said of the nomination of Mnuchin for Treasury Secretary: “I anticipate that with this new appointment, Treasury will continue to promote the department’s mission by encouraging a strong economy and creating economic growth and stability. As the economy further recovers from the Great Recession it is imperative that the housing industry and Treasury work in hand and hand to ensure housing and economic prosperity.”

Mnuchin left Goldman Sachs in 2002 after 17 years with the global investment banking firm to become vice chairman of hedge fund ESL, and he later became CEO of another hedge fund, SFM Capital Management. In 2009, Mnuchin and a group of investors purchased the failed Pasadena-based IndyMac bank from the FDIC for $1.5 billion after the mortgage meltdown and renamed the bank OneWest. In the years immediately following the crisis, OneWest’s foreclosure practices generated considerable controversy, particularly in California.

“If he gets the post, Mnuchin will bring a lot of mortgage expertise to the Treasury Department,” says Rick Roque, President of Menlo. “He bought Indymac, renamed it OneWest and then sold that company to CIT Group in 2015. That kind of experience, in addition to his experience in sub-prime origination, retail origination, and correspondent channels will prove to be very valuable to the non-depository mortgage banking market.”

The Consumer Financial Protection Bureau is likely to be reigned in if not rendered impotent or even abolished under President Trump. He has said he would come “close to dismantling” it along with Dodd-Frank. That is good news for small business, consumers, the economy in general — and note investors.

The CFPB is the brainchild of super-liberal Massachusetts Sen. Elizabeth “Pocahontas” Warren, who never met a business she doesn’t want to regulate.

“At stake is the agency’s aggressive approach to regulating credit and prepaid cards, mortgages, payday and student loans, debt collection, credit reporting and other areas of consumer finance since opening for business in 2011.”

WASHINGTON, Nov. 11, 2016 — Donald Trump has taken the first step to fulfill his campaign promise to “dismantle” Dodd-Frank and the Consumer Financial Protection Bureau. He is considering one of the leading critics of Dodd-Frank on Capitol Hill, Rep. Jeb Hensarling, as Treasury Secretary.

Mr. Hensarling last year laid out a blueprint for replacing Dodd-Frank that many observers view as a starting point. In an interview Thursday, he said the Trump team’s statement “is music to my ears,” and that he planned to make the bill, dubbed the Financial CHOICE Act, his top priority next year.

He said he had spoken with Mr. Trump’s team about the matter in the past, adding: “I think they like the thrust of the legislation and many major components of it.”

As for the prospect of him taking the Treasury slot, the Texas lawmaker said he would “certainly have the discussion” if the Trump administration comes calling, “but I’m not anticipating the telephone call.”

The transition team’s blueprint on the president-elect’s website states that the Trump team “will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.”

The president-elect has tapped Paul Atkins, a former Republican member of the Securities and Exchange Commission and longtime Dodd-Frank critic, to recommend policies on financial regulation. An aide to Mr. Atkins, who heads a financial regulation consulting firm, referred requests for comment to the Trump transition team, which couldn’t be reached.

Mr. Hensarling’s bill is built around a trade-off: Banks can free themselves from various regulations, such as tough stress testing, as long as they maintain capital equal to at least 10% of total assets and high ratings from their regulator.

That would immediately help many small locally focused banks that tend to be better capitalized, but not necessarily megabanks with sprawling international operations that generally have capital levels below that level.

In the interview, Mr. Hensarling said he would try to convince Mr. Trump’s team to support his approach instead of their campaign-trail promise to reinstate the Depression-era Glass-Steagall law separating traditional lending from investment banking.

Mr. Hensarling’s bill also would make other significant changes, such as requiring that many financial regulations be subject to cost-benefit analysis for the first time and tying the budgets of regulatory agencies, including the CFPB, to congressional appropriations.

The CFPB has enjoyed a high level of independence by getting its funds from revenues insulated from the legislative process.

It is possible Senate Democrats could seek to block GOP efforts they view as overreach, but lobbyists and congressional aides are optimistic that some moderate Democrats up for re-election in 2018 in states that voted for Mr. Trump will be inclined to compromise. Republicans also may come under pressure to change the Senate rules to ease passage of controversial legislation, but it is far from clear they would make that move.

Our take:

The proposed Seller Finance Enhancement Act – HR 5301…, an amendment to the Dodd/Frank legistation is way over due

This bill rolls back some of the excessive regulations of Dodd/Frank by allowing Seller Financed transactions to expand from 3 in a rolling 12 month period to 24 in a year.

While this is not a massive change, it will provide significant relief for the vast number of real estate investors who choose to seller finance property.

If you were to rely solely on the marketing campaigns of the banks, it would be easy to think they have their vaults open ready to lend money to people looking to buy a business. While there has been some significant easing of their purse strings recently, seller participation in financing a significant portion of a business for sale remains constant, especially in smaller transactions.

In deals under $1.0 million, where an owner-operator business is being sold to an individual buyer who intends to take over the seller’s daily role, seller financing has always been the most dominant source of funding. This is mainly due to buyers unwillingness or inability to meet rigid bank collateral requirements. It is the old story of the banks offering to lend whatever amount the buyer can fully collateralize, and the buyer simply not being able to secure the entire loan (isn’t that why they go to the bank in the first place?).

While it can be a risk for a seller, the reality is that most often, seller financing is the only way to get the deal done. Furthermore, for an individual buyer, they want the seller to have “skin in the game” since that may be the only leverage the buyer has over what the seller has represented about the health of the business. After all, if the seller is not willing to back up their claims by absorbing some of the risk, it does not provide too much assurance or comfort to the buyer.

Unlike the late night real estate infomercials where the alleged “gurus” will teach you their great strategies for 100% leverage and how “you too can buy fantastic real estate for no money down”, small business sales are not done that way. While leverage plays a role, buyers have to come to the table with a deposit. For an individual buyer with limited resources, the risk can be great and that concern, coupled with few available lending sources, has meant that seller-financed deals is the norm in these size deals.Jim Sinclair, Senior Vice President of Murphy Business & Financial Corporation LLC, a national business broker and M & A firm, advises his seller clients to “act like a bank if they are going to offer financing to the buyer.” To this end, he urges them to do a thorough background and credit check on the buyers. Sinclair says that while deals vary greatly, “under the right scenario, a buyer can expect the seller to carry a maximum of 50% of the total purchase price as a balance of sale.”

One major change Sinclair has seen recently is that several banks have lowered their minimum deal size from $500,000 to around $350,000. This is great news for individual buyers as they now have another option where none existed before.

Once the deal size starts to increase, the percentages and amounts that banks will contribute increases commensurately. The most common form of bank financing to individual business buyers has been from those institutions participating in the Small Business Administration’s 7(a) loan program. Under the SBA umbrella, the government guarantees a percentage of the loan that a bank will make. There is very specific criteria regarding the SBA 7(a) program eligibility and collateral guidelines, and while the government essentially guarantees part of the loan, the banks must be in compliance and the buyers must meet other specific guidelines.

John Martinka, of Martinka Consulting, a Washington state mid-market mergers and acquisitions firm, was involved in a deal recently representing the buyer in the purchase of a Washington-based fabrication business. In that deal, “a competing buyer to his client could not get approved for financing and the suspicion is he would not personally guarantee the loan or put up his house” as collateral.” Martinka also explained that “relevant business experience, meaning some management experience by the buyer is a requirement.”Martinka is typically involved in deals under $10.0 million and regardless of the percentage of bank financing, he notes that a portion of all of the deals include some participation by the seller in the financing. In other words, the banks want to see the seller absorbing some of the risk as well.

While banks may be softening their stance regarding deal size, buyers cannot escape having to be qualified financially and experience-wise, and must be willing to personally guarantee the loan. This is also the case with seller-based financing although in these instances, while personal guarantees are required, the assets of the business, rather than personal ones, are usually pledged by the buyer. Similarly, when selling a business, the owners need to realize that they are going to have to participate in the financing to some extent. The smaller the deal; the more they have to fund it. While every seller would obviously would prefer an all-cash deal, those deal terms are not common. No matter how badly the parties want to do a deal, both sides need to keep an open mind regarding the financing terms because nothing gets done without funding.

Acquiring income producing property is one of the best ways to create wealth and achieve one’s long term financial objectives. However, at some point, many investors tire of managing their properties. If you are an absentee landlord, this may experience this soone r than later. Of course the natural question is…. if owning real estate is not as glamorous or as easy as is promoted, what else does one do to create wealth? The stock market? Well maybe not—this year’s average returns are roughly 2% with a lot of risk like playing in a casino.

For example two seasoned investor friends bought several lower price band rental properties in Birmingham, Chicago, Indianapolis and Milwaukee. They were convinced their target 20% cap rate was very a reasonable. Now after 2 years, multiple property managers, handymen, evictions, code violations, phantom tenants etc, they saw their very easy projected cap rate drop to more like 6-7%. The stress, worry and frustration really began to take their toll.

Friend #1, Jason, decided to just bail and sell. He is putting his money into group foster homes. If professionally operated he will generate a serious return and satisfy his passion-to help kids, get his wife out of work, not to mention the serious cash flow. Friend #2, Dan, has decided to sell his properties and be the bank with seller financing. He decided to turn all the tenant worries into mail box money. He doesn’t want a job, just the cash flow.

Dan and I discussed the variables. As a seasoned note guy and seller carry consultant I made several recommendations to Dan on how to structure the transactions. We discussed the pros and cons. How to structure the transaction– to make a long term play with minimal risk. I was able to utilize my years of real estate experience and note structuring basics to demonstrate to him how, if structured properly he could generate a safe and reliable 10%+ return on his investment. A quantifiable and predictable rate of return.

When structuring a seller carry back, Dan is taking a very proactive approach—focusing on six primary underwriting areas. While his goal is to quickly sell his rentals, above market pricing, he wants to mitigate risk and maximize his return and still keep his options open in the event he wants to sell his seller carry back note in the future and avoid a deep discount(haircut) on the note resale. He is not just selling to anyone with a pulse thus minimizing risk and no stress .

Dan is implementing the following underwriting criteria.

The Borrower –pulling credit and making sure the borrower is putting down at least 15-20%, thus the buyer will be a bankable risk and has real skin in the game.

The asset value—sell the asset at no more than 10% over market value

Interest rate—charge at least 8% if not 10%, but still within the guidelines of Dodd-Frank

Term—keeping it as short as possible-10-20 years

Paperwork—use a title company to draft the note, deed of trust/mortgage and provide a closing statement proving the down payment. Utilizing a MLO to qualify the buyer and work within the current guidelines of the Dodd-Frank Act. FYI–buyer pays for this service.

Escrow— Require escrows for taxes and insurance

Proof of monthly payments—setting up a loan servicing company to collect the monthly PITI and disburse monthly as instructed. The buyer pays the servicing fee.

The net result is:

Never worry about dealing with tenants or property maintenance

Maximize the sales price

Defer capital gains

Keep your equity working for you usually at rates 35x higher than with a bank CD and significantly safer than the stock market

April 26th, 2016 |

by Jason Oliva

Never a stranger to controversy, the Consumer Financial Protection Bureau has been making headlines lately, perhaps less for its enforcement actions and rule-makings, and more for debates regarding its constitutionality.

As high profile court proceedings continue to unfold in the nation’s capital, there is a chance that changes may finally arrive to the CFPB’s structure and authority, suggests one recent editorial from The Wall Street Journal.

“In its short, unhappy life, the Consumer Financial Protection Bureau has compiled a record of abuse rivaling that of Washington’s most entrenched bureaucracies,” WSJ writes. “But there’s new reason to hope that this misanthropic creation of Dodd-Frank may not reach adulthood.”

The editorial points to the ongoing litigation between the CFPB and PHH Corporation (NYSE: PHH), a Mount Laurel, N.J.-based mortgage services provider, who the CFPB alleges broke the law when it referred customers to mortgage insurers that brought reinsurance from PHH.

The WSJ notes that the “unaccountable” CFPB overturned longstanding interpretations of law and specific guidance from the Department of Housing and Urban Development in its claims against PHH.

PHH is currently challenging the CFPB’s $109 million fine levied against it—roughly 18 times the amount determined by the Bureau’s own administrative-law judge.

For this “egregious” behavior, the Washington, D.C. Circuit Court of Appeals, as well as the WSJ, are wondering whether any of the CFPB’s actions are constitutional. More specifically, does this rogue agency have the authority to conduct such raids on American businesses?

“Judges on the D.C. Circuit asked because the consumer bureau is truly something new in Washington: a powerful independent regulatory agency run by a single federal official who cannot be removed from office at the will of the President,” WSJ writes.”The President can only fire the bureau’s director for cause.”

However, the editorial notes that the Constitution’s Article II gives the President authority to run the executive branch, and that includes the ability to fire top officers.

The CFPB’s single-director structure, along with the fact that the Bureau is not subject to Congressional appropriations, like other federal agencies, has long been a source of contention amongst agency opposition.

But while other federal agencies, such as the Social Security Administration, are also run by “one man exercising so much power,” according to the WSJ, the SSA “cannot tell business how to generate the cash to fund payroll taxes or tell beneficiaries how to spend them.”

“The consumer bureau, on the other hand, roams the financial landscape enforcing 18 statutes and bringing actions that can cost hundreds of millions of dollars,” WSJ writes. “It writes rules governing a wide swath of American business, has the power to define what is ‘unfair’ or ‘abusive’ in financial services, investigates companies and imposes penalties.”

Article II of the Constitution gives the President “not some of the executive power, but all of it,” noted Judge Brett Kavanaugh, one of the judges who is hearing the case between CFPB and PHH.

“For the sake of liberty and the integrity of the separation of powers, they should strike down this offense to constitutional governance,” WSJ writes

Later this year, the Dodd-Frank Wall Street Reform and Consumer Protection Act will reach its sixth anniversary, but if Congressional Republicans have their way, Dodd-Frank won’t reach anniversary number seven and many of the financial reforms enacted by the landmark law will be repealed or replaced.

According to the Republican arm of the House Financial Services Committee, Rep. Jeb Hensarling, R-TX, who chairs the House Financial Services Committee, is planning to announce a Republican plan to replace Dodd-Frank.

Hensarling plans to reveal the Republicans’ plan in a speech on June 7 at the Economic Club of New York, the House Financial Services Committee said Tuesday.

During the speech, Hensarling is expected to announce a Republican-crafted plan to replace Dodd-Frank with a “pro-growth, pro-consumer” alternative, that includes the potential significant regulatory relief for financial institutions, as well as a dramatic overhaul of the Consumer Financial Protection Bureau.

While specific details on the plan are sparse at this point, Hensarling did reveal some of what can be expected in a recent speech at the National Center for Policy Analysis.

In that speech, given earlier this month, Hensarling called Dodd-Frank a “a monument to the arrogance and hubris of man.”

According to Hensarling, the country is “suffering” from the “slowest, weakest, most tepid recovery” in the country’s history.

“Some would say a lot of this has to do with our inefficient tax code, and it does. But beyond the tax burden that entrepreneurs face, there is a larger burden known as the regulatory burden – the sheer weight, volume, complexity, and uncertainty of a needless avalanche of Washington regulations – much of which has come from Dodd-Frank,” Hensarling said earlier this month.

“So, hear me well,” Hensarling continued. “On behalf of all hardworking, struggling Americans, I will not rest – and my Republican colleagues on the House Financial Services Committee will not rest – until we toss Dodd-Frank onto the trash heap of history.”

In Hensarling’s speech, he railed against Dodd-Frank, arguing that the comprehensive financial reform legislation did more to harm the economy than help it in the wake of the financial crisis.

“Dodd-Frank stands as a monument to the arrogance and hubris of man in that its answer to incomprehensible complexity and government control is even more incomprehensible complexity and government control,” Hensarling said.

“It is a modern day Tower of Babel. 2,300 plus pages. 400 new regulations spawning tens of thousands of pages of red tape,” Hensarling continued. “And its foundation very much rests on a false premise: that somehow deregulation was the root cause of the crisis. But it was not deregulation. In fact, in the decade leading up to the financial crisis, regulatory restrictions in the financial sector actually increased. It was not deregulation but it was dumb regulation.”

According to Hensarling, the “dumbest” regulation of all was the affordable housing goals of Fannie Mae and Freddie Mac, which “incented, cajoled, and mandated financial institutions loan money to people to buy homes that they could not afford to keep.”

And now, instead of “promoting financial stability” as Dodd-Frank was designed to do, it has failed, Hensarling said.

“Now when they voted for it, supporters of Dodd-Frank said it would promote financial stability, end too big to fail, and lift the economy,” Hensarling said. “None of this has come to pass. Instead, five and a half years later, it has become evident that our society has become less stable, less prosperous, and most ominously, less free.”

In his speech, Hensarling spoke about several points of tangible proof that show that Dodd-Frank is a failure.

Among those is reduction in the number of banks that offer free checking and the tight credit restrictions of the Qualified Mortgage rule.

According to Hensarling, “roughly 20% of the people who qualified for a mortgage in 2010 will no longer be able to qualify due to (the QM rule’s) rigid debt-to-income ratio.”

And one of the worst aspects of Dodd-Frank, according to Hensarling, is the creation and rise of the CFPB, which Hensarling calls a “tyrant” comparable to a “Soviet Commissar,” due to its wide-reaching power.

“With respect to the CFPB, it is a case study in the overreach and pathologies of the unaccountable, administrative state run amok. At almost every opportunity, the Bureau abuses and exceeds its statutory authority, which is already immense,” Hensarling continued.

“The Bureau operates with such secrecy, unaccountability, and bureaucratic tyranny it would make a Soviet Commissar blush,” Hensarling added. “It acts as judge, jury, and executioner, all without accountability and all without due process. This should alarm every American, because as we become less governed by the rule of law and more governed by the whims of Washington regulators, fear, doubt, uncertainty, and pessimism are sown.”

According to Hensarling, the Republican plan to repeal and replace Dodd-Frank will undo much of the harm done by the law, and will be based on six principles, which are:

1. Economic growth must be restored through competitive, transparent, and innovative capital markets

2. Every American must have the opportunity to achieve financial independence

3. Consumers must not only be viciously protected from force, fraud, and deception, but also from the loss of economic liberty

4. Taxpayer bailouts of financial institutions must end, and no company can remain too big to fail

5. Systemic risk must be reduced through market discipline

6. Simplicity must replace complexity, because complexity can be gamed by the well-connected and abused by Washington bureaucrats

“Both Wall Street and Washington must be held accountable,” Hensarling said.

Hensarling did reveal one of the key tenets of the Republican plan, the potential for a significant reduction in a financial institution’s regulatory burden in exchange for the company keeping a substantial amount of capital on its books.

The aim of this portion of the plan is to allow “bankers” to grow the economy, free of regulatory overhang.

“The most important feature of our plan, the essential core of our plan, will be to provide vast regulatory relief from Washington micromanagement in exchange for banks who choose to meet high but simple capital requirements,” Hensarling said.

“It will be an election, and it will essentially be the functional equivalent of a Dodd-Frank off-ramp. If financial institutions elect to hold strong, Tier I capital, they will gain strong regulatory relief from both Dodd-Frank and Basel’s burdensome regulations and capital standards,” Hensarling continued.

“In a nutshell, if a bank chooses to have a fortress balance sheet that protects taxpayers and minimizes systemic risk, then bankers ought to be allowed to be bankers and grow our economy,” Hensarling said. “It is that simple. In addition, as I said in our principles, we will end taxpayer bailouts and repeal Titles I and II of Dodd-Frank.”

Hensarling said that another part of the Republican plan is significantly change the structure of the CFPB, by putting the agency on a Congressionally-controlled budget, and creating a bi-partisan commission to oversee the CFPB.

“Let us remember ultimately though that this is not a debate about deregulation or regulation. It is really a debate over the future of the economy, and the hopes and dreams of millions,” Hensarling said.

“On one side are those who believe ultimately in the Progressive vision of a ruling elite who ultimately can decide for the rest of us about our credit cards, our checking accounts, our mortgages, because they are smarter than us,” he continued.

“The rest of us still passionately believe that the true source of our prosperity is not to be found in Washington. It is to be found in freedom and free markets and free enterprise,” Hensarling concluded. “We believe that well-functioning, transparent, and efficient capital markets will provide a ladder of opportunity. When all Americas have greater opportunities, the economy will rise with them. So it’s a choice between two different futures and two different visions.”

The interest rate is 12%. I collect interest for the year of $1,200 and principal of $1,000 in the first year. How do I report the $1,000 principal collected on the tax return? — Bruce Moeller

At first glance, this might seem to be a complicated tax question, but fortunately for note investors there are two simple solutions. I’ll show the commonly used method first.

In your example, the note, which is an asset, was purchased at a 50% discount. As the payor makes the contractual payments, half of each principal dollar paid is your investment coming back and half is profit. So on your income tax return, with $1,000 of annual principal paid, you would show $500 of “discount earned” and $1,200 of “interest,” both of which are taxable as income. The other $500 of the cash flow is your investment coming back, termed “return of capital,” and is not taxable.

If you look at a typical two column amortization schedule for your example, principal and interest, imagine the principal column being split into two more columns, 50% of which is “discount earned” with the other 50% being “return of capital.”

To clarify with a slightly different example, assume you bought the $10,000 note at a $3000 discount, for a purchase price of $7000. As each principal dollar was collected, 30% would be taxable “discount earned” and the remaining 70% is your untaxed “return of capital.” Interest is still interest.

There is another method referenced by the IRS which is less frequently used. You did not quote a yield or a length of term in your example, so let’s just say it was priced to yield 18%. You can print an amortization schedule showing your $5000 investment at 18%. The principal column, although it won’t match the payor’s schedule, is your money coming back and the “interest” column, which also does not match the payor’s, is really your total taxable yield. The reason this is not selected often by investors — although the IRS unsurprisingly is happy for you to use it — is that more taxable income appears in the early years with more untaxable “return of capital” in the later years.

Article from The Paper Source, INC courtesy of John Moren who is the author of the NoteSmith family of loan servicing software that tracks mortgage notes, discounted notes, leases, rent, and other cash flows. www.NoteSmith.com.

When a note buyer begins their due diligence, there are 6 factors that are considered when a note is underwritten. They are determining and trying to mitigate their risk. The note seller took the promise of the house buyer that they would pay per the terms of the note. We as the buyer are being asked to assume that promise—that risk. Sometimes cart blanch. Therefore, it is our job to trust but verify. In the event the note is not perfectly structured, we’ll mitigate our risk with a discounted offer.

Borrower –are they bankable? The #1 influence on a note’s value is the person making the payments.

This is also the first thing an investor checks when going through the due diligence process. The buyer affects many other factor’s in the value on a note such as the collateral’s upkeep, the down payment, the seasoning, etc. Whenever you are valuating a note, making a buyer profile should be top priority. Included in the profile:

Type of buyer, rehabber or “mom and pop” (sold personal residence)?

Did you happen to review the buyer’s tax returns?

Did you verify their credit?

Income (ratio or proof)

Job / Employment

Another words, since you were lending them $$$$, you would want to make sure they’d pay you back?

The credit on a buyer is not just their FICO score, but the 5 C’s of credit and how each factor complements or redeems another.

Capacity to repay is the most critical of the five factors, it is the primary source of repayment – cash. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships – personal or commercial- is considered an indicator of future payment performance. Potential lenders also will want to know about other possible sources of repayment.

Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Interested lenders and investors will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business before asking them to commit any funding.

Collateral, or guarantees, are additional forms of security you can provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can’t repay the loan. A guarantee, on the other hand, is just that – someone else signs a guarantee document promising to repay the loan if you can’t. Some lenders may require such a guarantee in addition to collateral as security for a loan.

Conditions — the intended purpose of the loan. Will the money be used for working capital, additional equipment or inventory? The lender will also consider local economic conditions and the overall climate, both within your industry and in other industries that could affect your business.

Character is the general impression you make on the prospective lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be considered. The quality of your references and the background and experience levels of your employees will also be reviewed

Collateral—down payment and the Condition of asset

Kinda like car dealer, they typically wants to get some down payment. You want to have a safety net.

Things to consider on collateral:

◆ Owner occupied or rental?

◆ Commercial or single family residence?

◆ Rehabbed home or prior residence of seller?

A home (single family residence) sold by the previous owners would be more appealing to an investors than a rehabbed home or one secured by mobile home and land. Previously, most collateral using seller financing were “unique” properties such as mobile home & land, land only or homes that bank’s wouldn’t finance. Due to the current economy however, seller financing is being placed on properties from single family residences to commercial property, giving their notes better value on the secondary market.

Equity –in the home as it related to the down payment and loan amount. Typically our underwriters are looking for 25-30% Equity in a single family. 50% on a mobile home or land. Otherwise known as “skin in the game”, the down payment on a note is important for two reasons.

The amount of down payment determines the Loan To Value(LTV) on a note (the lower the better), which investors look at when considering purchasing, and

It shows the buyer’s commitment to the property. The more they’ve personally invested, the greater chance they will continue to not only maintain the property, but stay current on payments.

Terms of note–The interest rate, amortization and balloon (if applicable) weigh on a note’s value in the following ways:

Interest: If a note has no interest it is a nail in the coffin of any possible note deal. If the interest rate is low, it will also take a hit on the discount. The higher the interest rate, the less of a discount the seller will have.

Amortization: The longer the note is amortized, the larger the discount. To combat this, most brokers present clients with a partial purchase offer alongside the full purchase offer.

Balloon: A note with a balloon has less of a discount because the money is closer to the payout. However, in certain cases a balloon that is too short can play a negative role in evaluating a note. The likelihood of refinancing to pay off a balloon must be logical and practical when cast against the buyer’s credit and current economy.

Seasoning—pay history. Paying not just their monthly payments, but are the taxes and insurance paid on time.

Depending on the credit of the buyer and the collateral (rehabber or not) the seasoning for note’s is typically as follows:

3-12 months: Best credit, not a rehabbed property

12 months or more: Sub 625 credit, rehabbed property

Paperwork –is there a lenders title policy? How is the note Serviced? Who pays the taxes & insurance

A well written note is typically serviced by an outside servicier, which is paid for by the buyer. We always use an outside servicier, therefore that is another cost we’ll incur.

Finally you have the last factor in a note’s evaluation, the paperwork. What investors verify are the following:

Note, Deed of Trust, Land contract, etc.

Federal Disclosures—is the note Dodd-Frank compliant?

Loan Application Verifications: includes income, employment and down payment.

If any of the variables are off on the above, the note will trade at a greater discount. But we can do some really creative stuff.

By Nick Cunningham
Posted on Wed, 13 January 2016 22:53 | 0
Low crude oil prices since the second half of 2014 have created a boon for consumers as the cost to fill up at the pump has plunged. The extra cash in the pockets of millions of motorists is often likened to an unexpected tax cut, which could help stimulate the economy.
Leaving aside the true extent of such a stimulus, which is debatable, there is a flip side to that coin. The collapse in crude oil prices is a huge blow to areas where oil extraction and associated industries are the bread and butter of the economy.
As petro-economies suffer from the bust in crude prices, the effects are showing up in the housing market.
Take North Dakota, for example, which was on the front lines of the oil boom between 2011 and 2014. In fact, North Dakota is probably the most vulnerable to a downturn in housing because of low oil prices. The economy is smaller and thus more dependent on the oil boom than other places, such as Texas. The state saw an influx of new workers over the past few years, looking for work in in the prolific Bakken Shale. A housing shortage quickly emerged, pushing up prices. With the inability to house all of the new people, rent spiked, as did hotel rates. The overflow led to a proliferation of “man camps.
Now the boom has reversed. The state’s rig count is down to 53 as of January 13, about one-third of the level from one year ago. Drilling is quickly drying up and production is falling. “The jobs are leaving, and if an area gets depopulated, they can’t take the houses with them and that’s dangerous for the housing market,” Ralph DeFranco, senior director of risk analytics and pricing at Arch Mortgage Insurance Company, told CNN Money.

New home sales were down by 6.3 percent in North Dakota between January and October of 2015 compared to a year earlier. Housing prices have not crashed yet, but there tends to be a bit of a lag with housing prices. JP Ackerman of HouseCanary says that it typically takes 15 to 24 months before house prices start to show the negative effects of an oil downturn.

According to Arch Mortgage, homes in North Dakota are probably 20 percent overvalued at this point. They also estimate that the state has a 46 percent chance that house prices will decline over the next two years. But that is probably understating the risk since oil prices are not expected to rebound through most of 2016. Moreover, with some permanent damage to the balance sheets of U.S. shale companies, drilling won’t spring back to life immediately upon a rebound in oil prices.

There are some other states that are also at risk of a hit to their housing markets, including Wyoming, West Virginia and Alaska. Out of those three, only Alaska is a significant oil producer, but it is in the midst of a budget crisis because of the twin threats of falling production and rock bottom prices. Alaska’s oil fields are mature, and have been in decline for years. With a massive hole blown through the state’s budget, the Governor has floated the idea of instituting an income tax, a once unthinkable idea.

The downturn in Wyoming and West Virginia has more to do with the collapse in natural gas prices, which continues to hollow out their coal industries. Coal prices have plummeted in recent years, and coal production is now at its lowest level since the Reagan administration. Shale gas production, particularly in West Virginia, partially offsets the decline, but won’t be enough to come to the state’s rescue.

Texas is another place to keep an eye on. However, Arch Mortgage says the economy there is much larger and more diversified than other states, and also better equipped to handle the downturn than it was back in the 1980s during the last oil bust.

But Texas won’t escape unscathed. The Dallas Fed says job growth will turn negative in a few months if oil prices don’t move back to $40 or $50 per barrel. Texas is expected to see an additional 161,200 jobs this year if oil prices move back up into that range. But while that could be the best-case scenario, it would still only amount to one-third of the jobs created in 2014. “The biggest risk to the forecast is if oil prices are in the range of $20 to $30 for much of the year,” Keith Phillips, Dallas Fed Senior Economist, said in a written statement. “Then I expect job growth to slip into negative territory as Houston gets hit much harder and greater problems emerge in the financial sector.”

After 41 consecutive months of increases in house prices in Houston, prices started to decline in third quarter of 2015. In Odessa, TX, near the Permian Basin, home sales declined by 10.6 percent between January and October 2015 compared to a year earlier.

Most Americans will still welcome low prices at the pump. But in the oil boom towns of yesterday, the slowdown is very much being felt.